Banks : RBI notification casts light on measures aimed at resolving bad loans - Kotak

RBI notification casts light on measures aimed at resolving bad loans. An RBI notification (1) clarifies its powers under a recent ordinance (2) allows the formation of oversight committees (OCs) under its aegis, (3) allows the formation of independent committees to decide a framework for reference for the Insolvency Code (IBC). RBI is also exploring the option to rate companies (currently done by rating agencies). There is little new in this notification, but we see it as a step towards resolving bad loans.

Clarity on a few issues, largely on expected lines

RBI issued a notification which broadly reaffirmed its powers available through a recent ordinance passed by the Government. It also reaffirmed that decisions taken by JLF members on specific exposures would be binding and non-adherence would attract strict penalties. A key positive is the formation of few more OCs under the aegis of RBI, a change from the aegis of the IBA (Indian Banks' Association), and expanding the role of OCs beyond loans that would be restructured under S4A. This was expected given that public banks were struggling to reach a consensus on haircuts and most importantly, the framework under which the resolution process is being undertaken. Adherence to a specific framework issued by RBI is becoming a bone of contention among public banks. We note these issues are of less concern for private banks as they have greater flexibility in negotiating with defaulters.

Other key highlights: (1) the framework of reference to IBC would be decided by independent members. (2) Coordination with all stakeholders to ensure that the recently issued powers are effectively utilized.

RBI's bid to rate companies intriguing

RBI indicates that it would look to spearhead the role of rating assignments - a role currently performed by rating agencies. A separate fund would be established for this with contributions from banks and RBI. The key rationale appears to be (1) controlling rate-shopping by corporates, and (2) resolving conflicts of interest. We are not sure if this would be implemented in the current framework as rating agencies could look to modify their business model to comply with the regulator's objectives, nevertheless, it is a bit surprising given that RBI is publically voicing its opinion on the nature of credit rating by agencies.

Nothing new to read into this notification; need to resolve recognized bad loans

On the face of it, we don't see anything new coming through this notification. We are looking forward to the implementation process and the ability to successfully execute a few large default loans/groups to get more confident about the underlying process.

There seems to be a fair amount of urgency today among various stakeholders to resolve the issue of NPLs at the earliest. However, the major disappointment appears to be the frequent breakdown in negotiating a settlement with large borrowers. Hence, it would be useful to understand the pace at which the above issues are dealt with, especially on the formation of OCs. We are probably past the peak in terms of NPL recognition and public banks are taking severe charges to earnings as delay in resolution is resulting in NPLs ageing leading to higher provisions.

Source : Equity Bulls

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